Goldman Sachs Exchanges: Great Investors

A conversation with Renaissance Technologies

CEO Peter Brown
Peter Brown, CEO, Renaissance Technologies
Raj Mahajan, global head, Systematic Client Franchise,
Global Banking & Markets, Goldman Sachs
Date of recording: July 27, 2023

Raj Mahajan: Welcome back to another special edition of

Goldman Sachs Exchanges: Great Investors. I'm Raj
Mahajan, the Global Head of the firm's Systemic Client
Franchise in Global Banking & Markets and your host for
today's episode.

Today I'm delighted to be speaking with Peter Brown, CEO

of Renaissance Technologies, one of the world's most
successful investment firms that pioneered a new way to
invest using quantitative strategies and predictive models.
We will be discussing Peter's career, the role that machine
learning and early generative language models have played
in Renaissance's growth, and how the firm has navigated
through the market's most difficult and volatile periods.

Peter, it's truly a pleasure to have you on the program.

Welcome.

Peter Brown: Thanks a lot, Raj. It's a pleasure to be here.

Raj Mahajan: Let's kick it off. Peter, my understanding is

that you had nothing to do with finance until age 38 and,
instead, began your career working on automatic speech
recognition. How did that happen?

Peter Brown: So, at one point during high school I learned

about the 4A transformer. And I thought this was about
the coolest thing I had ever seen. Probably because I went
to an all-boys' school and had nothing better to
contemplate.

Anyway, for some reason I got into my head that with the
4A transformer it should be possible to recognize speech.
You just take the speech data, transform it into the
frequency domain. Match it up against patterns for words.
And presto, magic, HAL would be born. And this idea
always stuck around in the back of my mind.

Then when I went to college I majored in math and physics.

But in my senior year I had to fulfill a distribution
requirement. So, I took a course in linguistics. And one day
in the back of that course I heard a couple students talking
about some guy whose name was Steve Mosher who
started a company called Dialogue Systems that was doing
speech recognition. And I thought, wow, great, I
remembered this idea from back in high school.

After class I raced over to the physics library. That's

because this was before the internet, so you had to go to
the library. And I looked this guy up. And I found a paper
he'd written. And I tracked him down. Applied for a job.
And he hired me. And when I was there, I just fell in love
with the idea that through mathematics it might be
possible to build machines that do what humans do.

I just loved the idea of exposing human intelligence to be

nothing more than robotic computation.

Raj Mahajan: So, the class in linguistics was a

springboard into you branching out into broader fields like
machine learning and language, is that right?

Peter Brown: Yeah. After four years at this company, I

went to graduate school at Carnegie Mellon where I studied
artificial intelligence. And my advisor there was someone
named Jeff Hinton who The New York Times recently
labeled as the godfather of AI. In fact, I was his first
graduate student.

But while I was there, I had a girlfriend in New York. And

so, I spent my summers working in IBM research. And then
after I got my PhD, I went to work for IBM full time on
speech recognition, machine translation, and the
construction of what today are called large language
models.

Raj Mahajan: So, when you say large language models,

do you mean ChatGPT and what we're reading about
today?

Peter Brown: Well, sort of. They were pre trained, like
ChatGPT is. They're generative like ChatGPT is. And like
with ChatGPT, the entire goal was to take a bunch of text
and predict the next word of text. But remember, back then
it was before the internet and before the NVIDIA gaming
chips. So, we had a lot less data and a lot less computer
power. And we were constantly scrounging around for data
from places like the Canadian Parliament, the Federal
Register, the American Reading House for the Blind. We
even got data from the depositions in the IBM anti-trust
lawsuit.

We had very little data. And very little computer power.

Just some time allotted to us on an IBM mainframe, which
is probably less powerful than your cell phone is today. But
yes, like with ChatGPT, the idea was to see if we could
build a language model purely from data that would mimic
human knowledge of grammar and semantics.

Raj Mahajan: How'd it work?

Peter Brown: So, 35 years ago we published a paper on

one such model. But instead of using the transducer
technology that's in neural networks today, we used a
somewhat different technology. And whereas ChatGPT was
trained from 300 billion words of text, our model was
trained from around 100 million words of text.

The idea, again, was to take a bunch of text and assign

probabilities to what the next word might be. So, we could
use it to generate text. And I brought along an example,
because you had asked me about this.
Raj Mahajan: Very cool. Let's hear it.

Peter Brown: Yeah. This is an example of text that was

generated 35 years ago from a generative pre-trained
language model.

"What do you mean?" "I don't know," said the man. "Is it,"
he asked, said the man. "They are not not to be a good
idea. The first time, I was a good idea. She was a good
idea." "Certainly," I said. "What's the matter?" "May I be
able to get the money," said the man. "Scott was a good
idea." "Mrs. King," Nick said, "I don't know what I mean.
Take a look at the door. He was a good idea." "I don't know
what I mean. Didn't you," he said.

Now, I don't know where all this "I don't know what I mean"
is coming from. And I don't know where this "good idea"
stuff is coming from. Maybe that's the way they talked in
these IBM depositions. They constantly talked about good
ideas. I don't know. Anyway, you can see there's been a lot
of progress in the past 35 years.

Raj Mahajan: Nevertheless, it's still pretty amazing you

were working on this back then. Obviously, you didn't get
the reaction to that paper that ChatGPT is receiving today.
I'm curious, what did people think of your work at the
time?

Peter Brown: Well, back then the party line was that to
have a computer do tasks that humans do, you had to feed
the computer with a bunch of domain-specific knowledge.
So, for example, if you wanted to do French to English
translation, you had to tell the computer about French
grammar.

And we came along and were feeding it nothing but data.

And that approach was really frowned upon. In fact, our
first paper on translation received a two-sentence review,
which I have posted on the wall in my home study. And
remember what that review said. It said, "The information
theoretic approach to machine translation was, indeed,
first suggested by Warren Weaver in 1949. And was
universally rejected by 1950. The paper is simply beyond
the scope of COOLING.

Now, COOLING was the name of the conference that we

submitted it to. Amazingly, despite this rather scathing
review, the paper was actually accepted.

Raj Mahajan: That's like the news article in a locker

room that motivates the team for next week's game. I want
to zoom out a little bit just to give some perspective on the
impact of this work. How does your work on translation
relate to what we might see today in Google Translate?

Peter Brown: Well, when we got the Canadian Parliament

data, we found it came in both French and in English. Our
thought was to see if we could build a translation system
entirely from that data. We did this by imagining that
translation was a statistical process and we would estimate
the parameters from the data. And I thought the thing
worked surprisingly well. It was nothing like translation by
today's standards. And Google and other firms have taken
this to an entirely different level. But still, it was a start.
And I was quite happy with it.

We had a contract to do machine translation from the

Defense Advanced Research Projects agency. But we were
always looking around for an application that would
convince the IBM brass that we weren't completely wasting
our time.
At one point we decided to create a spelling corrector. And
we thought we could create this fantastic spelling corrector
because we could take context into account, which
currently spelling correctors, current at that time, did not
do. They didn't do it because they didn't have language
models and they didn't have the computational power to be
able to do it before then.

So, we took the Canadian House of Parliament data, and

we built a big language model from the English side of that
data. And then we built a little model of keystroke errors
and used it to create a spelling corrector. And we
demonstrated it to IBM management.

And what we found was, and what they found was no

matter what they typed in, the system would clean up all
their mistakes and produce English text. They were amazed
by this. So, at one point, one of them went up to the
keyboard and just typed in a bunch of random keystrokes.
And out came the sentence, "Politics cost Canada more
than bear hunting." Which, I guess, is the kind of random
statement a Canadian Parliamentarian would make back
then.
Raj Mahajan: Seems that you were right at the
vanguard of the machine learning movement in 1993. So,
why did you leave an exciting career at IBM for a small
financial company in Long Island that no one had ever
heard of?

Peter Brown: Bob Mercer and I had each consulted for IDA
in Princeton. And Jim Simons used to work at IDA. And he
had hired an IDA cryptographer named Nick Paterson. And
Nick recommended us to Jim. And so, Jim then sent us
some letters.

I threw mine out because I was very happy with my job at

IBM. But Bob decided to go out and check the place out.
When he came back, he told me I should go out there too.

Now, I had no idea who Jim was. But I learned that his
original partner was someone named Lenny Baum who had
invented the EM algorithm. And we knew all about the EM
algorithm because we used it heavily in our work on
machine translation and in speech recognition. So, I
figured if Lenny was Jim's partner, Jim had to be a serious
customer.
Then three things happened. First, Bob had a second
daughter accepted to Stanford. But he couldn't afford to
pay for her to go to Stanford on his IBM salary. So, she had
to go to the agricultural school at Cornell, which offered
scholarships to New York State residents.

The second thing that happened is we had a daughter

born. And a third thing was that Jim then offered to double
my compensation. After that offer, I came home. I took one
look at our newborn daughter and realized I had no choice
in the matter. So, the decision to leave computational
linguistics for a small hedge fund that no one had ever
heard of was made purely for financial reasons.

Raj Mahajan: So, when you arrived at Renaissance in 1993

with no background in money management, what did of
actually do there? And what did you decide to do?

Peter Brown: Yeah, so Bob and I did different things. He

wanted to work on futures, which was how they were
making their money at the time. But I wanted to work on
equities. They had just started an equities system. But it
had only lost money. But I figured with all those stocks,
there had to be some way of making money. Unbeknownst
to my wife, I put our life savings into the company's funds
as a way of motivating me and set to work.

Now, when we arrived, we found a half a dozen

mathematicians who were very smart and very creative.
But they'd learned to program by reading the computer
language models. And as I'm sure you can imagine, Raj,
that's no way to learn how to program. They had no idea
how to build large systems. So, part of what we did was to
introduce what was then considered modern computer
science to Renaissance.

They also had a problem. Their equities simulator made

money. But their trading system consistently lost money.
At one point, I had an improvement to the simulator, and
they were going to code it into the trading system. And I
asked, "How are we going to be sure that the trading
system produces the same answers as the simulator?" And
they said, "Oh, that's not a problem. We'll just read over
the code very carefully." At that point I realized what the
problem was. Because you can't verify how a computer
program gets the right answers simply by reading it over.
I relayed this message to Bob who then joined me on the
equities project. And he said to me, "Peter, the way to gain
control of this company is to take over the code." So, that's
pretty much what we did. We rewrote the entire equities
system and then, just as Bob predicted in, I think, 1996,
we were put in charge of equities trading at Renaissance.

Raj Mahajan: Fascinating. Okay. So, by 1996 you and

Bob are running the equities side of Renaissance. How is it
that you also branched into commodities, options, futures,
and currencies, the other parts of the business?

Peter Brown: I think it was in May of 2002, Jim said he

wanted to go out to lunch. Now, this is kind of weird
because we always at lunch in the cafeteria. I thought, I
don't know, maybe he wants to get a nice meal or
something like that. I didn't know. But he took me to a
greasy hamburger place down to the road because I guess
that's what he liked to eat. But it was weird because I was
largely a vegetarian.

Any rate, at that lunch he told me that he was planning to

retire soon, and he wanted Bob and I to take over the
company. His plan was to put us in charge of all the
money-making activities at the firm, that is everything
except marketing, legal, HR, accounting, and so forth, at
the end of 2002. And then retire a year later.

So, at the end of 2002, Bob and I also took over the rest of
the technical side of the firm, which included the trading of
currencies, bonds, options, and futures. Now, our plan was
to use the equities code that we and others had developed
to trade these other instruments. But we recognized they
would not be so great for morale to tell, say, one of the
futures researchers, "You know all that code you spent the
last decade of your life developing, guess what, we're going
to throw it out." So, we had to spend quite a bit of time
getting everyone to buy into our plan.

To do this we used an approach that I learned from a

biography I'd recently read of Abe Lincoln, which was to get
them to come up with our plan themselves. Now, that took
some time, but eventually it all worked out.

Raj Mahajan: So, you're reading presidential

biographies, obviously preparing for leadership. Then did
you become co-CEO in 2003?
Peter Brown: Yeah, so that was the plan. The schedule
was for Jim to retire at the end of 2003. But then tragedy
struck. Jim's son, Nick, drowned while diving off of
Indonesia. A few years earlier, another one of Jim's sons,
Paul, had been killed when he was hit while riding his
bicycle by a car.

Raj Mahajan: That's tragic.

Peter Brown: It was really tragic. This is an

understatement. It was a tragedy of immeasurable
proportion. And it came shortly before Jim was about to
retire. Everything was put on hold. Given what had taken
place, Jim felt that he needed to continue working. So, he
put off his retirement plans and focused instead on raising
money for our institutional funds. He did this for another
seven years. And then retired at the end of 2009. And at
that point, Bob and I became co-CEOs.

Raj Mahajan: I'm really glad you brought up the

institutional funds. Why did you create them? And how
have they performed?

Peter Brown: Our investment strategy across all of our

funds is to maximize return, which we call mu, at an
acceptable level of risk, which we call sigma.

I remember early on there was a guy at Renaissance named

Andrew Mullhaupt who taught Bob and me about
investing. He told us a story about a trader at some large
firm who had evidently done a fantastic job at finding
opportunities to make money. But he ended up blowing up.
As Andrew put it, this guy was great at finding mu, but he
had a problem with sigma.

That story really resonated with me. So, we put a huge

amount of effort into controlling risk. Then at some point, I
think it was in 2000, Jim came back from a meeting of the
investment committee at MIT. He walked over to my office
and asked me to imagine that I had married a Rockefeller. I
said, "Okay." Thinking about that. Then he said, "What
would you tell her to invest in? In particular, would you
suggest that she put her money into the S&P 500?" I
couldn't quite figure out where he was going with this.

Raj Mahajan: Yeah, where's he going with this?

Peter Brown: But I answered the question. I said, "No."

And he asked, "Why not?" And I explained, "Jim, you know
the S&P is not a great investment from the point of view of
mu over sigma in risk adjusted terms." He said, "Exactly."
And then said, "Okay, suppose there was a vehicle that had
S&P-like returns, but with significantly lower risk, would
you advise her to invest in that?" I said, "Of course." He
said, "Okay. So, get cracking and build it."

So, that was the genesis of the institutional funds. The goal
was to create products with attractive, risk adjusted
returns.

Raj Mahajan: How did the company change at that

point?

Peter Brown: Well, when Jim stepped down, Bob and I

had been running the money-making side of the business
for seven years. And we had been running the equities area
for 16 years. Not much really changed on that side of the
firm.

But when he stepped down, we got control of the New York

office. And the first thing I did was to walk around that
office, find out what everyone was doing. And what I found
was that many people were doing jobs that could be
automated. So, we set out on a massive campaign to
automate our back-office operations.

We moved from checks and wires to SWIFT and ACH. We

replicated counterparties margin calculations. We built a
large legal database that could be accessed by computers
to fill out regulatory forms. We brought in AI systems to
automatically read and pay invoices. We automated the
treasury department so that cash and margin needs could
be managed by computers instead of humans.

My point of view was that Stony Brook produces a huge list

of transactions and New York City produces monthly
statements, K1s, and government filings. And I just didn't
see why humans need to be involved in the process of
translating trades to monthly statements.

Now, 13 years later, we're not done yet. And I'm

embarrassed to admit that we still even have a few people
who use Excel. But we're getting there. In fact, I was told
recently that we've eliminated 97 percent of the
spreadsheets that had originally been used in the
company. So, that was the main area in which things
changed when Jim retired.

Raj Mahajan: That's a really high bar. Is it true that

while Bob Mercer and you have different politics, you work
closely for nearly 40 years at IBM and Renaissance?

Peter Brown: Yes. It's true. Bob and I began working

together at IBM 40 years ago. And for most of the time,
we've had offices right next to one another. So, we've done
a lot together. And we're still really close.

In general, I find no better way of building friendships than

through the collective creative process of building
something together. And I see no reason why politics
should interfere with friendship.

Raj Mahajan: At the start of 2018, Bob Mercer stepped

down. And since, you've been the sole CEO of Renaissance.
What effect did that have on the company and on you
personally?

Peter Brown: So, Bob is an incredibly intelligent person.

But he's a bit of a loner. In fact, I think when he was in
high school, they asked him to take some test to see what
he should be when he grows up. And it came back
recommending that he become a forest ranger so he could
sit alone in a tower all day overlooking a forest.

Raj Mahajan: It didn't say a quant researcher?

Peter Brown: No. Thank goodness he didn't take their

advice to become a forest ranger. At any rate, because Bob
tends to be relatively quiet, I've always done most of the
management. And as a result, what I did on a day-to-day
basis really didn't change all that much.

But still, it was a huge change not to have Bob as co-CEO.

When it was the two of us, we'd consult with one another
and there was enormous comfort in knowing that we both
took responsibility for what was going on. And that
disappeared the day Bob stepped down. And since then,
knowing that if something goes wrong it's all on me is quite
stressful in a way that it wasn't when Bob and I were in it
together.

Raj Mahajan: Aren't there others now at Renaissance

with whom you can share those responsibilities?
Peter Brown: Certainly. We have an incredibly deep
bench at Renaissance. And I'm continually astounded by
the quality of our employees. Our Stony Brook office is
chockablock full of highly accomplished physicists,
mathematicians, and computer scientists. And our New
York office is staffed with accountants and lawyers who
make it clear to me every single day that scientists don't
have a monopoly on brain power. So I'm surrounded and
supported by an amazing retinue of outstanding
colleagues.

Raj Mahajan: Peter, I want to explore risk for a few

minutes. You mentioned 2020. But during your time at
Renaissance, there've been other occasions when the
markets have become quite volatile. For example, in 2000
when the dotcom bubble burst. Then during the 2007
August quant quake. The 2008 financial crisis. The 2010
flash crash. Can you tell us what it was like at Renaissance
during each of these episodes of risk and volatility?

Peter Brown: Let me start with March of 2000 when

the dotcom bubble burst. We were doing extremely well
back then. And we had large positions in the internet
stocks. They were traded on NASDAQ. At one point the
head of risk control came to me and said he was worried
about the size of our NASDAQ positions. But I told him not
to worry, the computer knew what it was doing.

Then we took a big loss one day. So, I worked through the
night trying to understand what was going on. The next
day we took another big loss. And I, again, worked through
that night. So, now it's the third day and I hadn't slept for,
I don't know, 48 or 50 hours. And I was sitting in a meeting
with Jim and a few others when the head of production
knocked on the door and asked to speak with me. I walked
out of the meeting, and he told me we were down again by
a large amount.

So, I walked back in the meeting, and I must have turned

white or something because Jim took one look at me and
said, "It doesn't look good." Now, not having slept the
previous two nights, I remember thinking I'm not sure I can
get through this. But I really didn't have much choice in
the matter. And so, we got back to work and eventually we
did get through it.

A couple days later I went into Jim's office and told him
that I'd screwed up in not appreciating the risk we were
taking and said that if he wanted me to resign, I would
resign. But he responded, "Peter, quite the opposite. Now
that you've been through such a stressful losing period,
you're far more valuable to me and to the firm than you
were before." Now, that response really tells you something
about Jim Simons.

Raj Mahajan: That's extraordinary. How about 2007?

Peter Brown: I suppose you're talking about the quant

quake in 2007? August? When that happened, I was on
vacation, and I was on a very long flight back to Newark
Airport. And the moment the plane landed, my phone went
nuts with all kinds of texts and missed phone calls.

So, I called into work when it was going on and I got Kim,
Jim's assistant. And she said, "Jim wants you to get back
here as soon as you're physically able." So, I raced out. I
found a taxi, leaving my family to fend for themselves at
Newark Airport. And pushed the driver to drive as fast as
he could from Newark to Long Island. I ran into my office,
and I found Jim, Bob, Paul Broder, who was head of risk
control, all holed up. And the office was full of cigarette
smoke. I could barely breathe. And then there was this, I
remember seeing this, 16 oz cup full of Jim's cigarette
butts. And I'm thinking, like, why do they have to do this in
my office?

And they were all staring through the haze at the computer
screens trying to figure out what was going on. And Jim
was interpreting every little wiggle and various graphs. He
was really scared. And he wanted to cut back and hard.
Paul also wanted to cut back.

Raj, I'm sure you know, the head of risk control always
wants to cut back.

Raj Mahajan: Always.

Peter Brown: Because he doesn't get paid to make

money. He gets paid to make sure you don't lose money.
And Bob, you know, Bob's always very calm. But he wasn't
against cutting back.

But I looked at the data and saw that the model had these
enormous predictions, the likes of which I had never seen
before. It was clear to me what was going on. People were
dumping positions that were correlated with their own
positions. And they were driving prices to ridiculous levels.
I felt they had to come back. I argued that we should not
cut back. That this was going to be the greatest money-
making opportunity we'd ever seen. And if anything, we
should increase our positions.

But it was three against one. And so, we continued cutting

back. But I succeeded somewhat because we cut back at a
slower pace. And then at one point, miraculously, the
whole thing came roaring back. And indeed, it was an
incredible money-making opportunity.

Now, what we learned from that was to always make sure

we have enough on reserve to just hang on. Later, when
Jim was about to retire, I reminded him of this period and
asked if he was concerned that I was going to be so
aggressive that I was going to blow the place up. But Jim
responded that the only reason I was so aggressive was
because I knew he was determined to reduce risk, another
example of Jim's insight into human nature.

Raj Mahajan: Wow. That's fascinating. Let's go to 2008

and the global financial crisis.
Peter Brown: Right. In the fall of 2008. In October, I
think it was, we had more reserves on hand. And so, we
were secure in our own positions. But others with whom
we did business may not have been. At least we feared they
may not have been.

Remember, in August of 2007, it was only the quants who

were affected by the quant quake. In the fall of 2008, the
whole financial system was stressed. So, we were
concerned with the stability of our counterparties. So, we
spent a lot of time with those counterparties and examined
their CDS rates and so forth.

I remember at one point, two senior executives from some

firm we did business with came into our New York City
office to meet with us. They assured us that the funds we
had in our margin account were safe with them. And I was
inclined to believe them. Why not? But after the meeting,
Jim said, "Peter, they wouldn't have come to our office.
They wouldn't have requested the meeting unless they were
in real trouble. It's time to get out." So, we did. And Jim
was right because shortly thereafter, that firm just
disappeared.
And then finally, I remember the final one, yes, it was the
flash crash. That was May 6th, 2010, if I remember
correctly. The Dow dropped a lot, like 9 or 10 percent and
recovered, you know, a half an hour later. If you'd gone to
lunch, Raj, or maybe didn't go to lunch, I don't know, you
would have missed the whole thing.

For us, it was just another lesson in staying calm. We saw

trades being executed at absurd prices. We also noticed
large delays in the price feeds. So, we sat out for a little
while waiting for sanity to return. It did. And then we went
back to business.

For me, the most important takeaway from the flash crash
was that exchanges needed to increase their capacity to
handle spikes in volume. They've done this. And since
then, things have been better.

I think that historically there are going to be disruptions

like this from time to time. And I think the regulators have
done a lot to prevent panic selling. But I also don't think
they should get carried away because if you try to eliminate
volatility, you'll also do a lot of damage to the markets and
their ability to efficiently allocate capital.
Raj Mahajan: Peter, that's an excellent survey of the
market risk events over the past ten years. I want to move
to a different kind of risk, and that's Covid. How did you
and Renaissance respond to Covid?

Peter Brown: Like everybody else, we sent everyone

home during Covid. And with just a skeleton crew left in
Stony Brook to keep the computer running and to man the
trading desk. I suppose you guys did the same thing.

For about two years then we were working largely remotely.

But unlike other firms, I don't know how you guys did it, I
had no interest in seeing my colleagues' faces while we
were at home. And I wasn't sure I trusted the security of
Zoom or other video call services. So, we built our own
conference call system that enabled us to hold meetings in
which people could make presentations, post comments,
raise their hands to speak and so forth. That really worked
out well. So well that we continue to use it even when we're
back in the office.

So, we got a lot during Covid. Probably because there

wasn't much else to do. People couldn't leave their homes
and stuff. But I felt we weren't as creative working at home
as we were when we're together. I also felt that the esprit de
corps was better in person. So, spring, we all came back to
Stony Brook. And since then, things have been pretty
much back to normal.

Raj Mahajan: All right, here goes the understatement

of the podcast. Looking back, it's been well known that
Renaissance has been wildly successful. My question is,
how come? Do you have a secret sauce or recipe that you
can share with our listeners?

Peter Brown: Okay, Raj, I really don't know how

successful-- you probably do better than I do. I really don't
know how successful we've been in comparison to other
firms because I just don't pay attention to what others are
doing.

I guess there are some firms that make it their business to

learn how others make money and try to learn their
secrets. That's not our style. We just hire mathematicians,
physicists, computer scientists with no background in
finance and no connections with Wall Street. So, we really
don't have any insight into how others stack up compared
to us.

Now, as for our secret sauce, of course there's nothing I'd

rather do than disclose in great detail all the intellectual
property that we've spent decades and billions of dollars
creating. But what time-- I worry we don't have enough
time for that.

Well, instead I propose that I'll just mention a few

principles we follow. So, let's see. First. Science. The
company was founded by scientists. It's owned by
scientists. It's run by scientists. We employ scientists.
Guess what, we take a scientific approach to investing and
treat the entire problem as a giant problem in
mathematics.

Second. Collaboration. Science is best done through

collaboration. If you go to a physics department, it would
be absurd to imagine that the scientist in one office doesn't
speak to the scientist in the office next door about what he
or she is working on. So, we strongly encourage
collaboration between our scientists. For example, we
encourage people to work in teams. We constantly change
those teams up so that people get to know others within
the firm. We pay everyone from the same pot instead of
paying different groups in accordance with how much
money they've made for us and so forth.

Third. Infrastructure. We want our scientists to be as

productive as possible. And that means providing them
with the best infrastructure money can buy. I remember
when I was at IBM, there was this attitude that
programmers were like plumbers. If you need a big project
done, just get more programmers. But I knew that some
programmers were, like, ten times or more productive than
others. I kept pushing IBM management to recognize this
fact. But it did not.

I remember being in an IBM managers meeting and some

guy from corporate headquarters was explaining how they
created something called their headlights program. The
goal of which was to identify the best programmers in the
company and pay them 20 percent more than the other
programmers. Now, I figured this guy from corporate was
making, like, $300,000 a year. So, I raised my hand and
suggested they increase the pay of their best programmers
to $400,000 a year. And he was stunned. He said, "What?
More than me? You've got to be kidding me. Well, if the
guy's Bill Gates." I said, "No, Bill Gates was making, like,
400 million per year. Not 400,000." Anyway, they just
didn't get it.

We don't make that mistake. We pay our programmers a

ton in accordance with the value we place on the
infrastructure they produce.

Okay, our fourth principle is no interference. We don't

impose our own judgment on how the markets behave.
Now, there's a danger that comes along with success. To
avoid this, we try to remember that we know how to build
large mathematical models and that's all we know. We
don't know any economics. We don't have any insights in
the markets. We just don't interfere with our trading
systems.

Yes, of course there are a few occasions where something's

going on in the world and so we'll cut back because we
think the model doesn't appropriately appreciate the risk of
what's going on. But those occasions are pretty rare.

And finally, and most importantly, the last principle is

time. We've been doing this for a very long time. For me,
this is my 30th year with the firm. And Jim and others
were doing it for a decade before I arrived. This is really
important because the markets are complicated and there
are a lot of details one has to get straight in order to trade
profitably. If you don't get those details straight, the
transaction costs will just eat you alive. So, time and
experience really matters.

Raj Mahajan: Notwithstanding what you just said

about not intervening in markets, how do you see the
markets evolving from where we are today?

Peter Brown: Well, I hope, and I assume the markets

will become more automated with time. I'm pleased to see
the plan to go to one day settlement. I wish they'd move to
continuous settlement. I'd love to see around the clock
trading in all kinds of instruments. I'd like to see more
securitization, tokenization, and more digital contracts.
Although, there I feel the FTX mess will set those processes
back for a while.

Raj Mahajan: Related, how do you see Renaissance

evolving?
Peter Brown: Well, my primary goal is to keep
improving our existing systems. That has to do more with
the same but do it better. We have a strong track record
and that's good, of course, but all it really means is that we
know how to do one thing well, or at least have known how
to do one thing well. I think it's important that we not get
overconfident, and we stick to our knitting.

Of course, if other opportunities in our wheelhouse come

along, we'll explore them. But not at the expense of our
primary responsibility, which is to keep our eye on the
mothership.

Raj Mahajan: If it's okay, Peter, maybe we'll do a little

bit of a speed round. Is it true that although you have no
prior background in finance, your father invented the
money market fund?

Peter Brown: Yes. My father and his partner. I was a

rebellious kid who wanted nothing to do with my father's
business. So, I went into computer science and machine
learning.

Raj Mahajan: Is it true that at one point you went to

IBM to suggest that the statistical methods you were using
in speech recognition could be applied to finance, and
asked to be given an opportunity to manage some fraction
of IBM's corporate cash?

Peter Brown: Yes. I think that was in 1993. But IBM

corporate had absolutely no interest. So, instead we went
to Renaissance where we did the same thing we had in
mind for IBM, but instead with money Jim Simons had
raised.

Raj Mahajan: Quite an inflection point in financial

markets. Is it true that since you first joined Renaissance
you have spent nearly 2,000 nights sleeping in your office?

Peter Brown: Yes. My wife works in Washington DC.

And my experience has been that when a husband and a
wife work in two different towns, the husband commutes.
Psychologically, if I'm going to be away from my family, I
have to work. I sleep in my office when I'm in Long Island.

Raj Mahajan: Incredible. I mean, how does that work

for you?
Peter Brown: Well, for me, productivity wise it's really
fantastic being able to spend nearly 80 straight hours each
week with no interruptions except sleep thinking about
work before spending three more normal days at home. Of
course, I really miss my family. But the freedom to
concentrate nonstop on work while surrounded by my
colleagues is hugely valuable. And the job is so demanding,
I really don't see how I could do it otherwise.

Raj Mahajan: Is it true that you sleep very little, and

you will contact your colleagues at all hours of the night?

Peter Brown: Yes. I guess every question you have

asked so far, I have a yes answer. Yes. I'm just one of those
types who can't sleep. Not by choice. I just can't sleep. So, I
often am on the computer by around 2 am. And it's true, I
tend to send a lot of emails out in the middle of the night.

Raj Mahajan: It's what you say after the yes that's
actually more interesting. Is it true that you once gave
someone a raise so that you could call him in the middle of
the night?

Peter Brown: Sort of. I was working late with a

colleague named Jim. Not Jim Simons, another Jim. At any
rate. Jim and I were working away, and we needed an
answer to some question which some other guy knew the
answer to.

So, it was around 1 o'clock in the morning and I picked up

the phone to call him. And Jim says to me, "Wait. You can't
call this guy in the middle of the night. He doesn't make
enough money." So, I said, "Fine. How about this? I'll call
him. I'll tell him we're going to give him a raise. And then
ask him our question." And so, that's what we did.

Raj Mahajan: Is it true that you almost exclusively hire

people with zero background and finance?

Peter Brown: Yes. We find it much easier to teach

mathematicians about the markets than it is to teach
mathematics and programming to people who know about
the markets. Also, everything we do we figured out for
ourselves. And I really like it that way. So, unlike some of
our competitors, we try to avoid hiring people who have
been at other financial firms.

Raj Mahajan: In that case, what do you actually look

for in applicants?

Peter Brown: Math ability. Programming ability. A love

for data. A work ethic. And most importantly, the ability
and desire to work will in a collegial environment.

Raj Mahajan: How do you actually assess those

qualities?

Peter Brown: I think probably the same way other

firms do. First, we get resumes. Those that look promising
we give them phone interviews and we ask them for
references. If those pan out, then we invite the promising
applicants to give research talks. Talks like if you're
applying for a job at a university or something like that.
And then we put them through a grueling day of solving
problems in math, physics, statistics, computer science,
and so forth at a blackboard.

Raj Mahajan: All right, so now, is it also true that your

staff had to install mirrors in the corners of the office to
prevent you from flying into people as you rode a unicycle
around the office?
Peter Brown: Where did you get all these questions
from? Yes, it's true. Although, I don't ride a unicycle
anymore because at one point I crashed and the unicycle
broke.

Raj Mahajan: So, it was true. And there's one thing

we've got to ask before we stop which is hearkening back to
your days at IBM. I recently heard that in a talk you give at
Harvard Business School you mentioned that you had a
role in starting up the Deep Blue project at IBM. Can you
tell us about that?

Peter Brown: Wow. Okay. I had been at IBM for a year

or two. And I was standing in the men's room one day
when the vice president of computer science, a man named
Abe Peled walked up next to me. I thought to myself, now's
my chance. I turned to him and said, "Dr. Peled, do you
realize that for a million dollars we could build a chess
machine that would defeat the world champion? Think of
the advertising value to IBM."

He turned to me, looking kind of annoyed, and said,

"What's your name?" So, I told him. And then he said,
"Could you please let me finish up here?" And so, I
thought, wow, I had made a big mistake. So, I apologized,
and I high tailed it out of there as fast as I could hoping
he'd forget my name even faster. But a half hour later, he
called me in my office and told me that if I wanted to build
a chess machine, he'd put up the million dollars. I told him
that I was occupied with speech recognition. I have three
friends from graduate school who could build it. He said,
"Okay, hire them."

So, we did. They built the machine. I named it Deep Blue.

In the first match, the IBM machine was a very weak
machine. Weak physically. You know, I think only one
special purpose chip in it. And we lost. The final match,
however, was a different story. IBM had a much, much
stronger machine with hundreds of special purpose chess
chips. IBM won that match and IBM's stock jumped $2
billion afterwards. Of course, it fell back down later.

Now, a few years ago I was asked to speak at the Harvard

Business School. And when I arrived, outside the
auditorium, I could see all these protesters. And I thought,
oh no, why are they protesting me? What have we done? Is
there something I'm not aware of? I really didn't want to do
that.
But as I got closer, I could see they were all holding signs
about investing in Puerto Rico. And I thought, what is this
all about? I was totally confused because I didn't think we
had anything to do with Puerto Rico. Then it turned out
that the speaker before me was some guy named Seth
Klarman from some firm named Baupost. Evidently, that
firm had some investments in Puerto Rico and the
protesters were protesting him.

So, I went in to see Klarman's talk, or at least the end of

Klarman's talk, to find out what all the hullabaloo was
about. At the end of his talk, someone asked him his
thoughts on quantitative investing. I suppose it was a set
up for my talk. I don't know. And I carefully noted his
answer which was, "To do what I do takes a certain amount
of creativity and finesse that a computer will never have."
And all those Harvard Business School MBAs seemed to
really like that response.

So, when it was my time to speak, right after him, I began

by pointing out that after defeating Deep Blue in the first
match, Kasparov was elated and gave a press conference at
which he said, "To play chess at my level takes a certain
amount of creativity and finesse that a computer will never
have."

Raj Mahajan: Oh boy.

Peter Brown: I then went on to point out that two

years later we crushed him. Now, I'm not sure that's how
things will evolve. But whether it's speech recognition,
machine translation, or building large language models, or
chess, or making investment decisions, I continue to love
the process of showing that human intelligence, intuition,
creativity, and finesse are nothing more than computation.

Raj Mahajan: Peter, that's an excellent point to

conclude on. It's always such a pleasure to speak with you.

Peter Brown: Thanks a lot, Raj.

Raj Mahajan: And thank you for listening to this

special episode of Goldman Sachs Exchanges: Great
Investors. This podcast was recorded on July 27th, 2023.

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